Gift splitting is a tax strategy that allows a married couple to treat a gift made by one spouse as if it were made equally by both spouses, thereby doubling the amount that can be gifted without incurring a gift tax.
Benefits of Gift Splitting
Doubling Tax-Free Gifts
One of the primary advantages of gift splitting is that it allows married couples to combine their individual annual gift tax exclusion amounts, effectively doubling their ability to gift without facing tax liabilities. As of 2024, the annual exclusion amount per individual is $17,000. With gift splitting, a married couple can collectively gift up to $34,000 per recipient annually without triggering a gift tax.
IRS Compliance
Gift splitting must be properly reported to the Internal Revenue Service (IRS) using Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return. Each spouse must consent to the splitting on their tax return, ensuring compliance with tax regulations.
How Does Gift Splitting Work?
Example
Suppose John and Mary, a married couple, want to gift $20,000 to their child, Alex. Individually, any gift over $17,000 would be subject to a gift tax. However, by electing to split the gift, they can each allocate $10,000 of their annual exclusion towards the gift. Hence, the entire $20,000 gift falls within their combined $34,000 limit, avoiding gift tax.
Filing Requirements
To utilize gift splitting, both spouses must:
- Consent to gift splitting for that tax year.
- File a separate Form 709 for gift tax, even if one spouse made the entire gift.
- Ensure accurate and consistent reporting on both forms.
Tax Regulations and Considerations
Annual Exclusion Amounts
The IRS updates the annual exclusion amounts periodically to account for inflation. It’s crucial to check the current limits when planning gifts.
Lifetime Exemption
Gift splitting does not affect the combined lifetime gift and estate tax exemption, which is $12.92 million per individual for 2024. Using gift splitting can strategically help reduce taxable estates over time.
Community Property States
In community property states, half of all gifts made with community funds are automatically considered gifts from each spouse, providing a natural basis for gift splitting.
History and Legal Background
Gift splitting was introduced to provide tax relief and equalize gifting privileges among married couples. It has evolved with amendments to the Internal Revenue Code, reflecting inflation adjustments and policy changes in estate and gift taxation.
Applicability
Gift splitting is particularly beneficial for wealthy couples seeking to reduce their taxable estate or to make substantial gifts without immediate tax consequences. It’s widely used in estate planning to maximize tax-free wealth transfers to succeeding generations.
Related Terms
- Unified Credit: The combined lifetime exemption from gift and estate taxes, allowing individuals to transfer a significant amount of wealth without incurring tax.
- Annual Exclusion: The amount an individual can gift each year without triggering the gift tax, set by the IRS.
- Form 709: The form required by the IRS to report taxable gifts and elect gift splitting.
FAQs
What happens if only one spouse consents to gift splitting?
Both spouses must consent for gift splitting to be valid. If only one spouse consents, the entire gift may be subject to gifting rules and potential taxes.
Can gift splitting be applied to multiple recipients in a single year?
Yes, couples can apply gift splitting to multiple recipients, effectively doubling the amount they can gift to each recipient within the annual exclusion limit.
How is gift splitting different in community property states?
In community property states, gifts made with community funds are automatically split between spouses, simplifying the gift splitting process.
Summary
Gift splitting is a powerful tool in tax and estate planning, enabling married couples to maximize their annual tax-free gifting amounts. By understanding the rules and correctly reporting to the IRS, couples can efficiently transfer wealth without incurring significant tax liabilities. Given its advantages and compliance requirements, gift splitting remains a pivotal strategy for effective financial planning.
